Insurers Can Make Real Difference to Climate Change

We’ve been denying or avoiding the truth about climate change for so long that even if everyone and every company made an about turn now, it might be too late to save the planet. Appealing to people’s conscience hasn’t worked. Graphic images of damage already caused and damage yet to come haven’t worked. Reminding them of the world their children will inherit hasn’t done a thing. So we have to hit them where it hurts, which is right in the money belt.

However, it’s not about making insurance products more expensive or placing stringent conditions on risks. It’s about showing people and corporations that not only will they lose money by not making changes, but also that making changes can earn them money.

Admittedly, it’s not a new approach. Many have tried and many have failed. So why should the insurance industry be any different? ClimateWise, a coalition established by the Cambridge Institute of Sustainability of 29 insurers, including some of the biggest names in the industry, we can succeed because we are uniquely position to drive home the extent of the risks and facilitate change.

Why should insurers care?

Why should anyone care, really? Aside from the obvious answer (we only have one planet and we can’t eat fossil fuels and money), we go back to money.

According to a report by ClimateWise, climate change and the increasing costs of natural disasters are increasing the ‘protection gap’ to unsustainable proportions. The protection gap is the difference between the total economic loss and the amount insured. Currently, it stands at £79 billion per year! There isn’t any industry in the world that can withstand losses of that magnitude. Not for long at any rate.

What can insurers do?

The first step is for insurers to use their investments (estimated at nearly £24 trillion) to help society increase resilience to natural disasters, including floods, storms and heat waves. They should also invest more in ‘green bonds’ as opposed to fossil fuel companies. Some insurance companies have already taken that step, but more need to follow their example.

The next step is to take our collective heads out of the sand. According to Maurice Tulloch, chairman of Aviva’s global general insurance division and of ClimateWise, insurers need to stop avoiding risk (making clients pay more for risk) and start managing exposure to climate risks more effectively.

Increasing insurance costs or limiting risks insured is like sticking a plaster on a gut shot wound. Tom Herbstein, ClimateWise’s programme manager, said that insurers need to address the root cause of the problem, which centres on increasing resilience. Herbstein adds that the insurance sector is positioned to play a powerful role in climate resilience, especially when it comes to encouraging external stakeholders to invest more ‘greenly’.

It can also convey a greater understanding of risk, especially to banks that need to understand the changing risks that should affect their mortgage portfolios. Communication with local governments and property developers can also help ensure new properties aren’t built in high-risk areas, or if they are built, that safeguards are established from the get-go.

It’s not just the public sector that can benefit, as John Scott from Zurich Insurance Group and chair of ClimateWise’s Investing for Resilience programme, says that the industry can provide invaluable support to the (private) people who need it most. Insurers can also work with insurance markets in developing countries to help grow the markets the right (climate change aware) way.

Commenting on this last point, Mark Carney, governor of the Bank of England, said, “Insurers, including those who are members of ClimateWise, have unique risk-management expertise to help address the protection gap among those who are most exposed to climate risk.”

And, as Herbstein said, “If the industry can start working outside its traditional risk-carrying role, it is going to have huge knock-on benefits. There is a real case for change.”